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U.S. corporate bond issuance is expected to be very strong in 2007 and 2008, driven in large part by substantial refunding of maturing and callable debt. Standard & Poor’s Ratings Services estimates that there was a total of $3.1 trillion in outstanding debt on December 31, 2006.

Of that sum, $328 billion of financial and non-financial company debt is likely to be refunded in 2007, with an additional $365 billion due in 2008, according to a new detailed report released by S&P. All together, the credit rating agency expects refunding activity in 2007 to average $27 billion per month, while gross issuance is expected to come in at $83 billion per month.

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In 2008, gross issuance will likely drop to about $70 billion to $75 billion per month. However, refunding needs will be fairly steady at $30 billion per month, notes the report. In other words, monthly net bond supply—which is calculated as gross issuance less refunding—should average out to $55 billion in 2007, and decline to $40 billion to $45 billion per month in 2008.

S&P explains that it arrived at these figures by examining maturing debt schedules of both fixed-rate (including zero-coupon issues) and floating-rate debt, as well as from firms exercising embedded call provisions on fixed-coupon debt. The report assumes that all maturing and called debt will need to be refinanced.

The bulk of the refunding amounts should be linked to $275 billion of maturing debt in 2007, and $314 billion in 2008. Floating-rate maturities will probably amount to 44 percent in 2007, and 36 percent in 2008.

S&P says it expects that call provisions—which exist on about 12 percent of fixed-rate debt—will be exercised on $53 billion worth of corporate bonds in 2007, and another $51 billion in 2008. “Call projections depend on the slope and absolute level of the yield curve, both of which are forecasted to be a mild call deterrent,” add the report authors.

Many of S&P’s assumptions are based on its expectations that the 10-year Treasury yield will climb slightly to 5.05 percent in 2007 and 5.40 percent in 2008. Nevertheless, the debt rater expects the three-month Treasury bill rate to decline to 4.4 percent in 2008, as S&P officials expect the Fed to cut rates starting in late 2007.

“Low interest rates and low interest rate volatility should continue to provide a favorable refinancing environment in 2007, but we perceive upside rate risks,” S&P warns in the report. Indeed, if rates climb above its baseline forecast, call volumes would fall by about 12 percent to 15 percent, it adds.

From a credit standpoint, S&P figures investment-grade refunding should look strong at $259 billion in 2007 and $298 billion in 2008. It expects refunding of junk debt to amount to $69 billion in 2007, and $67 billion in 2008.

From an industry standpoint, financial institutions and industrials will dominate the redemption calendar. S&P does concede, however, that not all maturing debt will be refinanced. It asserts many companies may choose to retire debt, as corporate balance sheets look fairly liquid. “Conversely, debt-financed equity buybacks and M&A activity should keep the issuance pipeline strong,” it adds.